An excerpt from The International Forecaster. Published on Wednesdays and Saturdays.
January 25 2014: As anyone who has been following China’s economic growth in recent years knows, much of that growth in the past 5 years has been built on easy credit from the People’s Bank of China and is causing real problems for the economy as a whole.
In the constant stream of 24/7 news it’s easy to lose track of the bigger picture. Case in point: China is taking over the earth. You may not have noticed this if you were just glancing at the headlines as they flitter across the newswires, but when you step back and take a look at just how fundamentally China’s position in the world has changed over the past decade, the scale of this transformation becomes staggering. With that in mind, let’s examine five signs that China is taking over the world, and what they really mean.
#1: China is the world’s largest energy consumer
In July 2010 the International Energy Agency released data showing that China had overtaken the US as the world’s largest energy consumer. In their report the IEA noted that the red dragon had consumed 2.252 billion tons of oil equivalent in 2009, or about 4% more than the US.
Although some may feel that this statistic only makes sense given China’s status as the most populous nation on earth, the energy consumption measure is not demographically driven. Instead, it reflects a number of different factors, including the industrial capacity, economic activity, and overall access to technology of a nation. In this respect, it should be no surprise that the US, with its abundant resources, dominant economy, and technologically advanced society had been the world’s largest overall energy consumer since the early 1900s. And it should be equally clear what it means that China has now surpassed the US in this measure: They are catching up.
Perhaps the most remarkable part of this statistic is the rapidity with which it happened. In 2000, Chinese energy consumption was half that of the United States. In one decade, thanks to annual growth rates reaching into the double digits, they were able to catch up. As a result, Chinese hunger for new energy capacity has been voracious. At the time that the report was released, IEA Chief Economist Faith Birol noted that China was seeking to bring on 1,000 gigawatts of new power generation capacity in the next 15 years (i.e. by 2025). To put that number in perspective, that is equivalent to the total generation capacity of the U.S., a capacity that was created through a century of steady growth.
This energy hunger has in turn propped up energy markets throughout the world over the past decade and a half. Uranium and oil prices have been sustained as a result even during the relatively stagnant growth in the world’s advanced economies over the same time period, and has led to increasing Chinese presence on the international energy scene, including CNOOC’s infamous failed $18 billion bid for Unocal in 2005 and its successful $15.1 billion bid last year for Canada’s Nexen.
Of course, given China’s newfound status as the world’s largest energy consumer, it was no surprise when we discovered…
#2: China is the world’s largest oil importer
Three years after surpassing the US as the world’s largest energy consumer, China also surpassed the US as the world’s largest oil importer. In October of last year the Energy Information Administration released data confirming that China had imported 6.3 million barrels of oil per day in September 2013, overtaking the United States’ 6.24 million barrels per day. Projections show that this gap is expected to continue growing into the near future. A separate forecast from global energy consulting firm Woods Mackenzie predicts that Chinese oil imports will reach a staggering 9.2 million barrels per day, or 70% of the world total, by 2020.
To be fair, this trend is being driven partly by declining US imports. Total US liquid fuels consumption declined in four of the five years between 2008 and 2012 due to stagnant economic activity and falling industrial productivity. Thanks to the shale oil boom, the US is now generating significantly more oil domestically, leading to reduced demand for foreign oil. Still, the Chinese side of the equation is staggering; in 2001, it was importing a mere 1.2 million barrels per day, making for a 500% increase in 12 years. And, if anything, the trend is only likely to accelerate as the Chinese economy continues to develop. At this point, the Chinese consume only 2.9 barrels of oil per year per person, just over 10% of the US figure of 21.5 barrels.
The economic effects of this growth are profound, but perhaps not as profound as the geopolitical ramifications. Since Nixon officially took the dollar off the gold standard in 1971, the US currency has been backed up by the petrodollar system; the Saudis and their OPEC cohorts agree to buy and sell oil in dollars (creating a constant demand for the dollar) and to recycle the money through the US financial system (including heavy investment in US treasuries) in return for protection under the American military umbrella. However, this system seems to be falling apart as the Saudi/US relationship is hitting its roughest patch in the past half century. Combine that with China’s growing demand for international oil and its penchant for signing bilateral trade deals in local currencies, and for the first time the idea of the Chinese yuan eventually replacing the dollar as the world reserve currency sounds less like crazy talk and more like inevitable eventuality.
Speaking of the yuan’s rise on the international stage…
#3: The yuan is now the second most used currency for international settlements
In December of last year the Society for Worldwide Interbank Financial Telecommunication (SWIFT) announced that the yuan had overtaken the euro as the world’s second most used currency in international trade settlement. The takeover happened in October 2013, when the share of Letters of Credit and Collection in yuan reached 8.7% of world trade, as opposed to the euro’s 6.6%.
Once again, the speed of China’s rise is what’s particularly remarkable about this feat. In January of 2012, the yuan only accounted for only 1.9% of global trade settlements, meaning yuan-denominated trade has more than quadrupled in less than two years. This is on the back of a concerted effort by Beijing to make the currency more available and accessible to international markets, including the establishment of offshore yuan centers and the creation of bilateral swap agreements with foreign central banks that allow those banks to more easily conduct trade and investment in yuan. In November 2013, the People’s Bank of China signed a $57 billion currency swap deal with the European Central Bank, one of 19 such agreements signed or renewed in the past five years.
Structural issues still mean that the world isn’t going to be trading in yuan tomorrow. The currency is still not fully convertible, meaning its value is still determined by Beijing’s arbitrary (and heavily manipulated) exchange rates. As a result, global payments in yuan account for a relatively anemic 0.84% of global trade. But that, too, is almost certain to change in the coming years. The PBoC has dropped a number of hints about reforms to the currency in recent years, HSBC is predicting full RMB convertibility by 2017, and the Shanghai special economic zone is shaping up to launch a pilot program to experiment with full convertibility.
Still, it’s hard to imagine that the dollar, which has enjoyed world reserve currency status since the Bretton Woods agreement at the end of the Second World War, could be set to lose that status in the foreseeable future. Surely if China is seeking to be taken as a serious contender for a possible future replacement of the dollar it would need to have something tangible to back up its upstart currency…
#4: China is the world’s largest gold importer
In recent years, China has been hoarding gold at a rate that would make Midas blush. Just the latest indication of this is China’s announcement earlier this month updating their official gold holdings for the first time in five years. The last time such an announcement was made back in April of 2009 the People’s Bank of China officially held 1,054 tons of the yellow metal. As of this month they are now claiming to have 2,710 tons in reserve. Given that these are official Chinese statistics, who knows how closely they reflect reality; but whatever the case it’s no secret that China has been gobbling up the world’s gold for years now. In fact, last year China imported over 1000 tons of it, surpassing even perennial gold-crazy India. The Chinese demand for the precious metal accounted for one-third of world demand, and shows no signs of abating.
After a years-long Chinese frenzy for buying up foreign gold mines, China is now also the world’s largest producer of gold. The 2013 statistics have yet to be released, but as of 2012 China had been the world’s top gold producer for the past six years in a row, producing over 400 tons of it in that year alone.
Some might argue that this can be explained by traditional Chinese interest in gold as a symbol of wealth. Maybe it’s nothing more significant than a nouveau-riche buying spree among suddenly wealthy Chinese businessmen. However, this isn’t China’s own interpretation of these facts. In 2011, a startling admission of the true intent behind China’s gold hoarding was discovered in a leaked diplomatic cable:
“According to China’s National Foreign Exchanges Administration China’s gold reserves have recently increased. Currently, the majority of its gold reserves have been located in the U.S. and European countries. The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold’s function as an international reserve currency. They don’t want to see other countries turning to gold reserves instead of the U.S. dollar or Euro. Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar’s role as the international reserve currency. China’s increased gold reserves will thus act as a model and lead other countries toward reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB.”
I suggest readers take a moment to re-read that paragraph and let its importance sink in. There, in black and white, is the starkest account of why gold prices are manipulated and why China is currently hoarding it that you are ever like to see. This does not necessarily mean that China is planning to make the RMB fully gold-convertible (although such a reading would be consistent with this rhetoric), but at any rate the Chinese are preparing for the next international reserve system and they seem to be betting the farm that buying gold is going to help to better position the yuan in that new system.
Of course, the dollar reserve system has been backed up by the barrel of a gun for decades now, and it would be hard to imagine that system going down without a fight. Which leads us to perhaps the most important sign that China is taking over the Earth…
#5: China is building up its military to unprecedented levels…and it isn’t afraid to use it
So far we’ve been looking primarily at signs of China’s growing economic importance, and in the painting of that picture there are no shortage of other points to be made. We could point out China’s overtaking Japan as the world’s second largest economy in 2010, for example, or China’s 2013 milestone of overtaking the US as the world’s largest trading nation.
As any economist worth his salt will tell you, however (sometimes in surprisingly frank terms), a nation’s economic strength is only as good as its military. It is no coincidence that Britain ruled the seas in the heyday of the British Empire or that the United States has been the only undisputed military superpower in the history of the world in the exact same period it has held its position as the world’s largest economy. Without economic might, there is no money for a military. And without a military, there is no ability to open markets for economic expansion (or to keep them open).
For all China’s bashfulness on the world stage, for all its apparent reticence to flex its growing geopolitical muscles in far-flung parts of the globe, the Chinese leadership are not dumb. They know that their access to Africa and South America and the Middle East and other resource rich areas are at least as dependent on their ability to hold their own militarily as they are on bilateral trade deals. This is precisely why the Chinese are expanding their military at breakneck pace and it explains why they are not shy about advertising this fact.
Again, just as in the economic sphere, it’s the scale and pace of China’s military transformation that is perhaps the most staggering. In the ten years since 2004, China’s defense budget has swelled from US$25 billion to US$114.3 billion. Much of that is going into the deployment of entirely new weapons and military equipment, from new stealth drones to a new hypersonic missile to the world’s first anti-ship ballistic missile (dubbed the “carrier-killer”) to a newly-commissioned aircraft carrier (with plans for three more).
What’s more, China is looking increasingly ready to flaunt their new toys and even make passive threats to use them when and if things heat up in the Asia-Pacific. In addition to the creation of their new “Air Defense Identification Zone” and even newer “Marine Defense Identification Zone” and continuing aggression in the South and East China Seas, China is making its boldest moves yet, including an extensive article in the government mouthpiece newspaper The Global Times boasting that China’s nuclear submarines are capable of attacking American cities in the event of confrontation between the two powers: “This is the first time in 42 years since the establishment of our navy’s strategic submarine force that we reveal on such a large scale the secrets of our first-generation underwater nuclear force,” the Global Times is reported as writing. “If we launch our DF 31A ICBMs over the North Pole, we can easily destroy a whole list of metropolises on the East Coast and the New England region of the U.S., including Annapolis, Philadelphia, New York, Boston, Portland, Baltimore and Norfolk, whose population accounts for about one-eighth of America’s total residents.” The stunning article was accompanied by 30 photos and illustrations, including graphics of estimated radioactive fallout from a nuclear strike on America’s west coast.
So what does this all mean? Is the world destined to be bought out by the Chinese? Or taken over at gunpoint? No, probably not. As anyone who has been following China’s economic growth in recent years knows, much of that growth in the past 5 years has been built on easy credit from the People’s Bank of China and is causing real problems for the economy as a whole. Next week’s looming default of a China Credit Trust Co. “wealth management product” threatens to be the thin edge of the wedge of the unwinding of the Chinese shadow banking sector and a possible very rocky ride for China’s finances generally. The PBoC is now desperately engaged in its Chinese calendar year-end smoothing over of all problems with a 400 billion CNY (and counting) liquidity injection.
The military build-up, meanwhile, may be a lot of pomp and hype on both sides of the Pacific more so than a looming threat to world peace. In stark contrast to the reported Global Times peace on nuclear targeting of the US (which is not available online), the Global Times website is running an editorial from Xinhua downplaying Japanese-Chinese tensions and calling for cooler heads to prevail.
So what is the game being played here? Ultimately, we are watching the creation of a theatre of operations for the Pentagon and their military-industrial cronies to play in. In a self-fulfilling prophecy, the DoD’s so-called “Asia-Pacific pivot” is having the perfectly predictable result of provoking China, causing troubles with China’s neighbors, and generally making everyone feel the military tensions more acutely. On one level, this can be understood as an economic fleecing of the American war machine by the same military-industrial complex that has been profiting off of the creation of every boogeyman since the end of World War II (at the very least). With defense spending going up across the region, American military contractors and suppliers are set to make a fortune on the region’s ratcheting tensions.
But we have to understand what’s happening here in terms of a much bigger picture. That picture is substantially similar to the one that gave rise to the great boogeyman of the 20th century: the Soviet Empire. As exhaustively documented by the likes of Antony Sutton, the great red menace was largely a creation of the west, including the New York financiers and their British and German accomplices who helped to fund, equip, and maintain a bloated and inefficient Soviet infrastructure that would surely have fallen apart on its own much quicker than it actually did with the economic and technological support of its supposed western enemies. In the precise same way, we have seen in recent decades the conscious and deliberate offshoring of much of the West’s industrial capacity to China as part of a plan to merge the totalitarian Chinese system with that of its own western enemies.
This plan is openly admitted by the real powers behind the throne of the American empire, and has been for decades. Upon his death, Chairman Mao Zedong, the architect of the Chinese Communist order whose rule was responsible for the deaths of an estimated 77 million of his own people, was hailed by David Rockefeller as a visionary leader: “Whatever the price of the Chinese revolution [an indirect reference to the tens of millions killed under his reign] , it has obviously succeeded not only in producing more efficient and dedicated administration, but also in fostering high morale and community of purpose… The social experiment in China under Chairman Mao’s leadership is one of the most important and successful in human history,” he wrote in his infamous 1973 New York Times obituary for Mao. He should know. It was under his protege Henry Kissinger’s tenure as National Security Advisor that relations with China were normalized, and under long-time family friend George H.W. Bush’s reign as U.N. Ambassador that the Republic of China was expelled from the U.N. and replaced by the mainland communists.
Just last year, Kissinger, in promoting his book on China, opined: “The challenge is how to build a world order for the first time in history on a global basis. We talk a lot about world community but the fact is there has never been a world community before,” before suggesting that the U.S. and China will have to work together to create this world order. This is perfectly in keeping with fellow globalist billionaire insider George Soros, who has referred to China on numerous occasions as the engine of the New World Order.
In fact, not only is this attempt to set China up as the boogeyman for the 21st century perfectly discernible, it was in fact predicted by none other than Anthony Sutton. Writing of the creation of Bechtel’s China division and its undertaking of engineering and construction contracts for the communist Chinese government in the early 1980s, Sutton wrote in “America’s Secret Establishment” that “By about the year 2000 Communist China will be a ‘superpower’ built by American technology and skill.”
Perhaps Sutton was a decade off, but here we are at the emergence of the Chinese ‘superpower.’ And so history begins to repeat yet again…
Source: The International Forecaster